Who will steal Jackson Hole spotlight?

It's that time of the year again! Every year since 1978, central bankers from the world over come to Jackson Hole, Wyoming to talk about the current economic issues.

This weekend, on September 1 and September 2, hotshots in the financial world will once again gather for the symposium. Among a long list of topics to be discussed, investors will definitely be on their toes for the plans of two major central banks: the ECB and the Fed.

Bond buying from the ECB?

In recent weeks, there have been speculations that the ECB would intervene in bond markets by buying bonds of peripheral EZ countries to keep their borrowing costs from rising.

Market junkies were hoping to get more clues on the issue at this week's summit.
However, the ECB announced yesterday that head honcho Mario Draghi will not attend the meeting due to a heavy workload in the coming days. In fact, no one from the ECB executive board will make it to the conference!

Of course, the announcement only fueled speculations even further, as investors believe that the central bank is busy ironing out the details of another bond-buying program.

However, don't get too excited just yet. Some analysts warn that Draghi will not let us in on his plans before the German Constitutional Court passes its rule on the legality of the ESM on September 12. That said, I doubt we'll hear any details about bond buying and a yield cap this weekend.

Bernanke Comments on QE3

Back in 2010, our old buddy Big Ben Bernanke basically dropped a bomb at Jackson Hole - a liquidity bomb, that is!

With the U.S. economy down in the dumps, Bernanke announced that the Fed would be introducing another round of quantitative easing measures which infamously became known as QE2. Two years later, could history repeat itself?

Not so fast, my young padawan economists. As it turns out, many doubt that Bernanke will go so far as to use the symposium as a signaling event for the Fed's future monetary policy plans. With the August NFP figures not due until next week, it is unlikely that Bernanke will take a strong position on QE3.

Instead, we can probably expect the Fed Chairman to merely follow the same wait-and-see tone that the Fed has steadfastly stuck to the past few months.

How will the financial markets react?

Many traders may be getting caught up in the euphoria ahead of the meeting and may already be pricing in additional easing measures from both the ECB and Fed.

However, I've got a feeling that many market participants will be disappointed by the results of the symposium. If and when this happens, we could see the dollar rally as optimism for more liquidity dies down.

On the other hand, if there's even the slightest hint that the ECB will push through with putting a yield cap on bond yields, or if Bernanke signals that the Fed is ready to dump billions into the economy, we could see a strong risk rally take place.

In any case, make sure you tune in every now and then and see what's developing at the Jackson Hole Symposium! You never know when a game-changer may rock the markets!

FX Week Ahead: EUR Unlikely To Break Summer Range

Developed currency markets will remain nervous this week ahead of the Friday 31 August Fed policy symposium in Jackson Hole, Wyoming. While the Fed has indicated it is prepared to further ease policy if a “substantial and sustainable strengthening in the pace of the economic recovery” fails to emerge, we think the odds are only 50/50 in terms of a QE3 announcement. Given elevated market expectations of a Fed move, last week’s EUR/USD grind higher now looks vulnerable to a correction lower this week. Adding to EUR vulnerability, uncertainty surrounding Thursday’s Italian bond auction could unsettle EUR bulls – particularly if the new 10Y bond fails to meet expectations. We therefore look for EUR/USD to continue to respect its summer trading range, sliding back towards 1.2450 this week.
XAU rise warns of growing investor concern. The latest move higher in XAU is also likely to garner greater investor attention this week. While central bank gold purchases (projected to exceed 500 tonnes this year) appeared to slip from investor radar screens in recent months, revived expectations for further Fed QE and the potential for the ECB to follow (not forgetting the additional monetary stimulus recently delivered by the BoJ and BoE) have refocused investor attention. Indeed, the SNB’s printing of more than USD60bn of new CHF in June to defend its EUR/CHF 1.20 currency floor warns central bank diversification demand is likely to grow stronger during H212. Indeed, as more private investors ask why central banks are seeking to diversify their fiat currency holdings and follow suit, renewed demand could see the XAU push through USD1,700 as early as this week. Perhaps more importantly, this deterioration in investor sentiment could see XAU move higher this week independently of the Fed policy outcome.
AUD pressure to contrast against CAD support. This week will see growing interest in macro themes as investors seek to avoid second-guessing policymakers. Such investor interest should translate into greater trading activity in peripheral currency crosses – particularly those more exposed to divergent growth themes. Given last week’s continued stream of softer Chinese data, divergent growth expectations relative to the US argue we maintain our short AUD/CAD recommendation. Indeed, notwithstanding economist expectations for a Chinese growth improvement in Q4, recent price declines in steel and iron ore warn markets are moving to price in a potentially sharper Chinese slowdown. We see a growing risk AUD/CAD breaks below its 1.0280 May low this week